A Rocky First Half
The Wall Street Journal summed up the first six months of the year with a simple but telling headline: S&P 500 Posts Worst First Half of Year Since 1970. Morningstar said the Dow’s performance was the worst since 1962.
In part, it’s a timing issue since both indexes hit their respective peaks in the first week of 2022 (St. Louis Federal Reserve data for the S&P 500 and the Dow).
Timing issues aside, stocks have tumbled since hitting all-time highs, and the S&P 500 Index has shed 23.6% from its January 3 peak to its June 16 trough, which officially landed us in a bear market.
Bear Market, Defined
For major U.S. stock indexes, a bear market is defined as a 20% decline from its most recent all-time high over a prolonged period of time. Typically, the period of decline is associated with negative investor sentiment, weak economic data releases, and expectations of a shrinking economy.
For those keeping score at home, the S&P 500 (considered the broadest measure of the U.S. economy) recently experienced a 20% decline from its all-time closing high reached on January 3rd, 2022, of 4796.57. Bear market territory is 80% of that level: 3837.26. This price area for the index has the attention of asset managers and traders.
So far, 2022 has been the year of the bear with very few places to hide, as even the “safer” bond market market was down over 10%.
Bear Market Durations
Good news–bear markets tend to last a much shorter period of time than their bull market counterparts. According to CNBC, the average bear market lasts 359 days, although there are no one-size-fits-all scenarios.
Let’s consider some recent bear markets:
Coronavirus bear market (2020) 33 days
The Great Recession bear market (2007-2009) 408 days
Dotcom bear market (2000-2002) 1.5 years
Each bear market has its own circumstances–including varying economic backdrops and events. Coronavirus featured, well, coronavirus. The Great Recession was all about subprime mortgages, and the Dotcom bear was about an overinflated tech market in the internet’s early days.
Contrarily, bull markets last much longer than bear markets historically, with the average bull market duration being 3.8 years since 1932 (according to data from Kiplinger). The longest bull market is fresh on everyone’s mind–lasting 11 years from 2009 to 2020.
For the current market cycle, we have inflation and interest rates front-and-center. The S&P 500 closed in bear market territory on June 13th, 2022, marking a 20% decline from the peak.
A re-do of 2007-2009?
Other than the more significant Covid drop (which didn’t have it’s roots in financial excesses and imbalances like most previous bear markets), most of us think back to the 2007-2009 or 2000-2002 declines. Today’s market weakness seems to share little in common with conditions during 2007-2009, when a housing bubble fueled by weak lending standards and massive speculation nearly brought down the financial system. While housing prices have soared and bubble talk abounds, bank capital standards are much stronger today and lending standards have tightened considerably since the housing bust. Moreover, the problem isn’t too many homes. It’s just the opposite: too few homes in too many locales.
But there are some parallels to the early 1970s.
That 70’s show
In 1972, the Consumer Price Index soared from an annual rate of 2.7% in the middle of 1972 to over 12% by the end of 1974, per St. Louis Federal Reserve CPI data.
In response, the prime loan rate leapt from 4.75% in early 1972 to a peak of 12.0% in July 1974 (St. Louis Federal Reserve).
An oil embargo, soaring energy prices, and a sharp rise in interest rates contributed heavily to a recession that began in late 1973 and lasted until early 1975, according to the National Bureau of Economic Research (NBER). While the roots of inflation in the 1970s do not mirror what we see today, we do find some similarities, including ultra-easy money in the early 1970s, a lack of fiscal discipline, and soaring oil prices tied to the 1973-74 OPEC oil embargo.
The U.S. is not as dependent on foreign sources today and much greater fuel efficiency mitigates some of the impact, but rising gasoline prices are playing a role in the rise in the CPI, which hit 8.6% in May (U.S. BLS).
Some commentators believe we are already in a recession. And while there are parallels between then and now, no two periods are exactly alike.
The S&P 500 Index has entered a bear market, which typically signals a recession. With the exception of the one-day market crash in 1987, we must travel back to 1966, when investors lopped 22% off the S&P 500 Index, but a recession was avoided.
Today, Fed Chief Jerome Powell continues to talk about the importance of getting inflation under control. And the Fed seems to be in no mood to veer from its inflation-fighting course, even if it means a recession.
While an official recession is still not a foregone conclusion, clearly the actions of the Fed and consumer sentiment indicators are indicating slowing economic growth. The big question is how steep is the slowdown and can it be managed to minimize significant damage before moving to the next stages of growth.
Although economic growth has slowed, consumer confidence is down, and a decline in Q2 GDP is on the table, job growth has been robust, layoffs are low (though they have ticked higher), and consumers are largely still splurging on travel and other services that were out of reach in the pandemic.
Furthermore, Moody’s Analytics argues that plenty of stimulus cash remains in bank accounts, which could support consumer spending, and typical signs of rising loan delinquencies have yet to materialize (St. Louis Federal Reserve).
Final thoughts
Trying to pinpoint a stock market bottom (or top) has proven challenging for even the “best” investing minds and economists. Today’s economic fundamentals have created stiff headwinds for equities. We know market pullbacks and bear markets are inevitable, and we recognize they can create unwanted angst. We also know that an unexpected, favorable shift in the economic fundamentals could fuel a sharp rally since sentiment today is quite negative.
As we have seen from over 200 years of stock market history, bear markets inevitably run their course and a new bull market begins.
We saw that after the 2008 financial crisis, and we saw that after the Covid lockdowns led to a swift bear market and a steep but short recession.
Regardless of the point in time of a market cycle, the disciplined long-term investor mindset should remain consistent. After all, building a secure future by accumulating assets over time will inevitably provide exposure to several market cycles and their associated peaks and valleys.
With that said, for some, it may be worth adjusting investments in the face of a market downturn. If you have questions about your portfolio or market cycles, or if there is anything I can help you with, please reach out, and we’ll discuss.
We know times like these can be difficult. If you have questions or would like to talk, we are only an email or phone call away.
As always, thank you for the trust, confidence, and the opportunity to serve as your financial planning partners.
Jeff Boyd
Thanks to Horsesmouth and Levitate.ai for their contributions to some of the data and links listed. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Diversification does not guarantee profit nor is it guaranteed to protect assets. Investors should be aware that investing based upon a strategy or strategies does not assure a profit or guarantee against loss.
The information and opinions presented are for general information only and are not intended to provide specific advice or recommendations for any individual. You should contact your investment representative, attorney, accountant or tax advisor with regard to your individual situation. The opinions of the presenter do not necessarily reflect those of Independent Financial Group, LLC, its affiliates, officers or directors.